Outlook under scanner for Dolby, DTS, DivX

Watch CNBC-TV18 live only on MYTV >>

By Deepti Govind

BANGALORE (Reuters) - The recent launch of Windows 7 and the increasing popularity of Blu-ray players will put the spotlight on the outlook of Digital media software companies.

Although analysts are not expecting any surprises in the latest quarter from Dolby Labs Inc, DTS Inc and DivX Inc, they will be eager to know if the increased holiday spending would translate into better forecasts.

"The managements, in all three cases, were probably conservative in terms of the guidance for the rest of the year, based on a still weak consumer spending environment," Maxim Group analyst Mark Harding said.

While all three companies license their technologies to Blu-ray products, DTS stand to gain the most if the new optical media format becomes anywhere as popular as conventional DVDs.

Sales of Blu-ray players rose 112 percent in the third quarter, according to trade body Digital Entertainment Group.

"Our checks show that both channel inventory as well as sell-through is pretty robust on the Blu-ray side," Harding said.

For Dolby, a company that is almost synonymous with audio technology licensing, the focus will be on the adoption of

Microsoft's Windows 7 and comments about attach rates associated with third-party DVD play-back software.

Some analysts feel that there might be a reduction in third-party attach rates as Windows 7 includes Dolby's technology.

"We expect the increased royalties from Windows 7 will more than offset the potential decline in third-party attach rates," said Piper Jaffray analyst Michael Olson in a research note.

Collins Stewart LLC analyst John Vinh recently raised his rating on Dolby to "hold" from "sell" on strong shipment trends in DVDs, notebook PCs, and LCD TVs in the previous quarter that has continued into the September quarter.

William Blair & Co analyst Ralph Schackart does not expect Dolby to guide aggressively for 2010, as he believes the company will wait for additional recovery before providing a more aggressive forecast.

PS3 BOOST FOR DTS

Financial performance at DTS, which earns royalties on every single Blu-ray device bolted with its mandated technology, is directly tied to Blu-ray's performance in three categories - PC drives, stand-alone players and Sony's PlayStation 3 gaming console.

Analysts are positive about PlayStation 3 sales in the quarter and expect the entertainment technology company's fourth-quarter forecast to be healthy due to the continuation of this trend.

Playstation 3 unit sales were 3.2 million in the September quarter, up 32 percent from last year and up nearly three fold sequentially. DTS receives about 40 cents to 50 cents in royalty for each PS3.

On the other hand, DivX is experiencing the "Blu-ray" gap, where sales of DVD players have dropped faster than the pick-up in Blu-ray sales, Avondale Partners LLC analyst Tom Kucera said.

DivX makes software that can compress and decode a video file and about 50 percent to 60 percent of the company's revenue comes from sales of DVD players.

"Near-term, they do not have any big growth going on," he said, adding that the company's future was more uncertain.

Expectations for the upcoming holiday season sales is mixed, with some analysts upbeat on it based on an improvement in the consumer spending environment, while others have adopted a more cautious outlook.

Here's what analysts are expecting from the three companies:

Reporting Date/Qtr EPS# Rev# Analysts#

Dolby Nov. 3, Q4 2009 $0.33 $156.3 mln 16

DTS Nov. 9, Q3 2009 $0.12 $15.8 mln 12

DivX Nov. 9, Q3 2009 $-0.01 $15.6 mln 6

# According to Thomson Reuters I/B/E/S

(Reporting by Deepti Govind in Bangalore; Editing by Anil

D'Silva)